Quản trị kinh doanh - Diversification strategy

Diversification StrategyIntroduction: The Basic IssuesThe Trend over TimeMotives for Diversification - Growth and Risk Reduction - Shareholder Value: Porter’s Essential Tests.Competitive Advantage from DiversificationDiversification and Performance: Empirical EvidenceRelatedness in Diversification OUTLINERATE OF PROFIT > COST OF CAPITALINDUSTRYATTRACTIVENESSCOMPETITIVE ADVANTAGE The Basic Issues in Diversification DecisionsSuperior profit derives from two sources:Diversification decisions involve these same two issues: How attractive is the sector to be entered?Can the firm achieve a competitive advantage?Diversification among the US Fortune 500, 1949-74 Percentage of Specialized Companies (single-business, vertically-integrated and dominant-business) Percentage of Diversified Companies (related-business and unrelated business)Note: During the 1980s and 1990s the trend reversed as large companies refocused upon their core businesses 1949 1954 1959 1964 1969 1974 70.2 63.5 53.7 53.9 39.9 37.029.8 36.5 46.3 46.1 60.1 63.0Diversification among Large UK Corporations, 1950-93COMPANY DEVELOPMENTSMANAGEMENT GOALSSTRATEGY TOOLS & CONCEPTS1950 1960 1970 1980 1990 Financial problems of conglomeratesRefocusing on shareholder valueRise of conglomeratesRelated diversification by industrial firmsEmphasis on“related’ & “concentric” diversificationRefocusing on core businesses DivestmentDiffusion of M form structuresAnalysis of economies of scope & “synergy”Value based managementCapital asset pricing modelPortfolio planning modelsCore competencesTransaction cost analysisDevelopment of corporate planning systemsDiversification: The Evolution of Management Thinking and Management PracticeJoint ventures, Alliance, corporateventuringCompetitive advantage throughSpeed, flexibility, and capabilityDynamiccapabilityQuest for GrowthFinancial AnalysisDominant logicMotives for DiversificationGROWTH --The desire to escape stagnant or declining industries a powerful motives for diversification (e.g. tobacco, oil, newspapers). --But, growth satisfies managers not shareholders. --Growth strategies (esp. by acquisition), tend to destroy shareholder valueRISK --Diversification reduces variance of profit flowsSPREADING --But, doesn’t create value for shareholders—they can hold diversified portfolios of securities. --Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk.PROFIT --For diversification to create shareholder value, then bringing together of different businesses under common ownership & must somehow increase their profitability.Diversification and Shareholder Value: Porter’s Three Essential TestsIf diversification is to create shareholder value, it must meet three tests:1. The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive).2. The Cost of Entry Test : the cost of entry must not capitalize all future profits.3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of “synergy” must be present)Additional source of value from diversification: Option valueCompetitive Advantage from Diversification Predatory pricing/tie-in sales Evidence Reciprocal buying of these Mutual forbearance is sparseMARKETPOWER Sharing tangible resources (research labs, distribution systems) across multiple businesses Sharing intangible resources (brands, technology) across multiple businesses Transferring functional capabilities (marketing, product development) across businesses Applying general management capabilities to multiple businesses Economies of scope not a sufficient basis for diversification ----must be supported by transaction costs Diversification firm can avoid transaction costs by operating internal capital and labor markets Key advantage of diversified firm over external markets--- superior access to informationECONOMIES OFSCOPEECONOMIESFROM INTERNALIZINGTRANSACTIONSCompetitive Advantage from Diversification Predatory pricing Evidence Reciprocal buying of these Mutual forbearance is sparseMARKETPOWER Sharing tangible resources (research labs, distribution systems) across multiple businesses Sharing intangible resources (brands, technology) across multiple businesses Transferring functional capabilities (marketing, product development) across businesses Applying general management capabilities to multiple businesses Economies of scope not a sufficient basis for diversification—must be supported by transaction costs Diversification firm can avoid transaction costs by operating internal capital and labor markets Key advantage of diversified firm over external markets--- superior access to informationECONOMIES OFSCOPEECONOMIESFROM INTERNALIZINGTRANSACTIONSRelatedness in Diversification Economies of scope in diversification derive from two types of relatedness:Operational Relatedness-- synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D)Strategic Relatedness-- synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses. Problem of operational relatedness:- the benefits in terms of economies of scope may be dwarfed by the administrative costs involved in their exploitation.Branson & the Virgin Companies: Making strategic sense of apparent entrepreneurial chaosKEY RESOURCESVirgin brandBranson -charisma/image --PR skills -networking skills -entrepreneurial flairDOMINANT LOGICSeek competitive advantage by start-up cos. pursuing innovative differentiation in underserved market with sleepy incumbentsCHARACTERISTICS OFMARKETSTHAT CONFORM TO THIS LOGICconsumerdominant incumbent scope for new approaches to customer servicehigh entry barriers to other start-upsBranson/Virgin image appeals to customers DESIGNING A CORPORATE STRATEGY& STRUCTURE What’s the business model? (Does Virgin create value by being an entrepreneurial incubator, a venture capital fund, a diversified corporation, or what?) Which businesses to divest? Criteria for future diversification What type of structure?—Is there a need for greater formalization?